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Over the last many months, a sense of uneasiness prevails at the Karachi Stock Exchange (KSE), the largest bourse of Pakistan. Though the benchmark KSE-100 index has remained range bound, daily trading volume has been drying.

This can be attributed broadly to: 1) imposition of capital gains tax (CGT) and 2) precarious law and order situation in Karachi. Added to these are extensive load shedding of electricity hovering around 12 hours a day and political instability. Hardly any fresh IPO has been offered and even the offering of OGDC shares has been deferred.

It may be true that since 2008, global stock markets remained under intense pressure and Pakistan could not be an exception. Lately, the relationship with global markets has become more pronounced because foreign investors have attained a significant stake in the local market. The only reason funds are still inflowing in Pakistan is that local equities are sold at a substantial discount to fair value.

Bulk of the trading volume remained confined to less than a dozen scrips. Therefore, the growing consensus is that the benchmark index has become lesser reflective of the investors' sentiments.

According to the analysts, the major reason for shrinking volume is an intrinsic fear regarding CGT. Investors have not understood nitty-gritty and the fear that once they submit the returns tax collectors will be after them asking too many annoying questions.

According to an analyst, 'the amount government would be able to collect from CGT would be far less than the amount collected under CVT. Since the tax liability under the CVT was considered final, there was no fear of harassment by the tax collectors.

The average trading volume reduced to nearly one-fourth during the last couple of years. Let one point be understood that speculators/generate volume which helps in price discovery. However, once there is hardly any trading it becomes almost impossible to determine what the real price should be. The added advantage of huge trading volume is substantial income for the brokerage houses. It is on record that when volumes are high, the quality of research reports improves and once the volume dissipates the quality of research reports also starts declining.

A few of the equities market analysts say that one should not be carried away by the huge volumes or thin volume. Focus should be on price movement and earning potential rather than historic payouts.

Despite many odds fundamentals, the listed companies remain intact. Similarly, hike in crude oil prices often create rallies in energy related stocks but investors often ignore that rise in prices of energy products erodes profitability of most of the companies.

Some of the analysts say that the growing size of mutual funds is because of small investors investing in funds rather than equities directly. It may be partly true because banks, insurance companies, large net worth investors are also investing in mutual funds. They also say that the recent increase in the overall size of mutual funds is due to issue of sovereign Sukuk. However, there is a need to undertake awareness programs for the retail investors, as they provide bulk of the liquidity to the market.

There is also a need to improve the regulatory framework as well as strengthening the apex regulator SECP. A point of concern is that SECP is still operating with two commissioners, one also acting as chairperson. This certainly mars the performance and particularly the settlement of claims pertaining to 2008 crisis.

Little has been achieved by the present government on the privatization front. The economic managers say that since the conditions are not conducive shares of public sector entities cannot be offered to public. This may be partly true but the real need is to improve the level of governance at the entities, restore their profitability, and above all improve the image. There is a growing perception that most of the government owned enterprises have been damaged to the level that injection of funds just cannot turn them around.
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Publication:Pakistan & Gulf Economist
Geographic Code:9PAKI
Date:Jul 17, 2011

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